It's getting crowded in here!

It was rotation week as investor rotated out of Tech, Consumer Discretionary, and Communication Services and went into Industrials, Materials, and Utility. The defensive Healthcare got a boost though from some vaccine related positive developments.

Small caps also caught a bid with the Russell 2000 heading higher by 3.56% for the week compared to the 1.25% for the S&P 500. US Dollar lost some ground as the Euro and other Scandinavian currencies were bid up. On the virus situation, the daily coronavirus cases climbed to a record high of 72,000. But, like in the past month, investors choose to ignore this to keep buying into equities. What was interesting though, was that Gold remained bid and so were US Treasuries signaling that not everyone shares the same risk-on feel. Chinese equities retreated 5% during the week, cooling off from the record breaking rally this year.

Here are three charts and some data points that stood out for me during the third week (13th to 17th) of July 2020.

Wall of Provisions

Major US Banks reported and they did not paint a good picture. Earnings were down, year on year by 51% for JPM, 74% for Citi and 49% for BAC as WFC reported its first loss since the financial crisis.

The chart below captures the provisions for loan losses as compared to GFC. Do notice that provisions kept moving up through 2008, peaking during the mid of 2009.

How long this wave will last will depend a lot on how the virus wave behaves in the US. The so-called second wave is actually a continuation of the first wave as the US, unlike Europe, never really got the curve back down. Trading revenue did come to the rescue for JPM and Citi with a 99% increase and 60% increase respectively.

Bank CEOs did not hold back in cautioning the market with Jaime Dimon of JPM saying "We don’t know what the future is going to hold. This is not a normal recession,” adding that the bank was “prepared for the worst-case scenario”.

The provisions are mostly based on guess work as many say, the actual delinquencies have not yet started. NYU's professor, Edward Altman, who created the Z-score formula for predicting insolvencies. More than 30 U.S. companies with liabilities in excess of $1 billion have already filed for Chapter 11 this year. He expects that number will probably top 60 by year-end as companies pile on debt. Individuals and Small Business will also feel the stress with the weekly unemployment bonus of $600 set to expiry by the end of July and the $669bn financing program for small businesses set to end next month.

The silver lining - Goldman and Morgan Stanley both reported strong revenues as traders took advantage of volatility. Goldman's results were driven by a 93% surge in trading revenue while Morgan's fixed income traders posted a 170% revenue increase.

Don't write off the write offs yet. Think we will see a lot more of it in the coming quarters. Things might get worse before they get better for the banks.

Just keeps getting Crowded

The recent Bank of America Global Fund Manager Survey showed the crowding into US tech continues with fund manager calling the trade "the longest 'long' of all time"!

A stunning 74% of the respondents said the "Long US tech Stocks" is the most crowded trade, the highest level ever, while 11% of them had the same opinion for Gold.

What was also interesting was that 71% of the managers say stocks are overvalued down from last month's reading of 80%. Two other things that stood out:

• even with this crowing into tech, the positioning is only about 1 Standard Deviation above historical average
• some green shoots in positioning into European assets (something I have written about on the 7th June)

China's SMIC triples on debut

Talk about stunning debuts! Semiconductor Manufacturing International Corp. surged more than 200% during its Shanghai debut following a stock offering that is set to be China’s largest in a decade.

The year-old STAR market in Bejing, styled like the US Nasdaq has been attracting listing from all kinds of technology companies. SMIC's deal pushed YTD listings to $14.1bn, third behind, Nasdaq and Hang Seng. All this is part of China's ambitious six years, $1.4 trillion technology master plan.

In the trade war that has lasted over two years now, US has often hit China where it hurts the most, China's dependence on semi-conductors. SMIC is China's number one contract manufacturer of chipsets and it plays a big role in Beijing's ambition of becoming self-sufficient in semiconductor production.

SMIC has some catching up to do. TSMC, the world's largest contract chipmaker is ready to commercialize 5 nano-meter technology, which is two generations ahead of SMIC's capabilities.

Capital market performance aside, China is on the right path of being independent and if they succeed, US will loose a vital bargaining chip! Do check out last week's notes on China for more on China's equity markets.

Disclaimer: The views and opinions expressed, if any, are of my own and do not necessarily reflect the official policy or position of the organization I work for.